With inflationary pressures in the Eurozone showing signs of abating and banking turmoil continuing across the Atlantic, the European Central Bank has decided to ease the pace of policy tightening, raising interest rates by 25 basis points today.
This follows three consecutive 50 basis point increases, starting in November 2022.
The ECB has now recorded a total of seven rate hikes since the summer of last year when it began the current policy tightening cycle, with the hikes cumulatively reaching 375 basis points.
Inflation appears to have stabilized in recent months, albeit at very high levels, giving ECB officials some room for less drastic hikes. Inflation was 7% in April in the eurozone, according to a preliminary Eurostat estimate, from 6.9% in March and 8.5% in February. European Central Bank experts see inflation at 5.3% in 2023, well above the medium-term target of 2%.
In the statement issued by the European Central Bank, it stressed that “inflation expectations remain very high for a very long time. Given the continuing pressures regarding high inflation, the Governing Council decided today to increase the three main interest rates of the European Central Bank by 25 basis points. .
In general, the inputs are broadly supportive of assessing the medium-term outlook for inflation that has formed The Board of Directors at its previous meeting. Headline inflation has eased in recent months, but underlying price pressures remain strong. At the same time, past interest rate increases are strongly transmitted to eurozone financing and monetary conditions, while the durations and intensity of the transition to the real economy remain uncertain.
Future Board decisions will ensure that policy rates are set at appropriately constrained levels in order to achieve a timely return of inflation to the medium-term target of 2% and to remain at these levels for as long as necessary. The Board will continue to use an evidence-based approach to determining the appropriate level and duration of restraint. In particular, the Board’s decisions on policy rates will continue to be based on its assessment of inflation expectations, taking into account incoming economic and financial data, underlying inflation dynamics, and monetary policy transmission strength.
The ECB’s key interest rates remain the Governing Council’s primary tool for setting the direction of monetary policy. At the same time, the Board of Directors will continue to reduce the portfolio of securities held by the Eurosystem under the Asset Purchase Program (APP) at a measured and predictable pace. In accordance with these principles, the Board expects to discontinue reinvestments under the APP from July 2023 onwards.
The main interest rates of the European Central Bank
The Governing Council decided to increase the three main interest rates of the European Central Bank by 25 basis points. As a result, the principal refinancing rate, margin financing facility and deposit acceptance facility rates will increase to 3.75%, 4.00% and 3.25%, respectively, as of May 10, 2023.
APP and PEPP software
The APP portfolio declines at a measured and predictable rate, as the Eurosystem does not reinvest all proceeds from redeeming securities at maturity. The reduction will average €15 billion per month until the end of June 2023. The Board expects to stop reinvestments under the APP from July 2023 onwards.
In connection with the PEPP Scheme, the Board of Directors intends to reinvest the capital amounts from the redemption of the securities acquired under the Scheme on their maturity at least until the end of 2024. In any event, future rollback (rollover) of the PEPP portfolio in such a way as to avoid interfering with the trend appropriate monetary policy.
The Board of Governors will continue to apply flexibility to reinvest amounts from redemption of PEPP portfolio securities as they mature in order to address risks to the monetary policy transmission mechanism related to the pandemic.
As banks repay amounts borrowed under LTRTs, the Governing Council will regularly assess how LTRTs contribute to the direction of its monetary policy.
The Board stands ready to deploy all tools at its disposal within its mandate to ensure that inflation returns to the 2% target over the medium term and to safeguard the smooth functioning of the CTM policy. The ECB’s policy toolbox is fully equipped to provide liquidity support to the eurozone’s financial system if needed. In addition, the Transfer Protection Instrument (TPI) is available to hedge against unwanted and turbulent market developments that pose a serious threat to the transmission of monetary policy across the eurozone countries, allowing the Governing Council to more effectively fulfill its mission of price stability. .
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